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Though investors may have forgotten by now, the 2022 tech bear market was brutal for U.S. equities. The sugar high from government spending led to several adverse factors. Forty-year highs in inflation spurred Federal Reserve Chairman Jerome Powell to change the Fed’s multi-year (and seemingly never-ending) “Dovish” monetary stance to a complete 180-degree turn.
In an attempt to quell rampant inflation and provide an oasis for the regional banking sector (which was on the brink of failure), Powell hiked interest rates at a dizzying speed. In turn, high-valuation growth stocks got pummeled, and the Nasdaq 100 ETF ((QQQ - Free Report) ) lost a third of its value.
Capitalism to the Rescue in the form of AI Stocks
Though the bear market was brutal for Wall Street, America’s history illustrates that bear markets ultimately transform into opportunities for investors wise enough to have liquidity. That’s because America’s best and brightest minds never stop innovating. In other words, innovation leads to earnings growth, and EPS growth sparks share prices.
ChatGPT Launch Changes the Game
The launch of OpenAI and Microsoft’s ((MSFT - Free Report) ) ChatGPT Artificial Intelligence (AI - Free Report) chatbot marked the turning point for the tech sector and the U.S. equities market. Within weeks of its launch, ChatGPT grew like wildfire and became the fastest consumer software app to eclipse the 100-million user mark in history.
Though there are no signs that the AI revolution is slowing, investors should learn lessons from what we have seen thus far -- because history tends to repeat itself.
5 Lessons to Learn from the AI Stock Boom
1. Invest in Leaders, Avoid Laggards
When a mega-trend captures the public’s interest, it can be easy for investors to be less selective. For example, in the heat of the internet bubble in the late 1990s, investors bid up any stock with a “.com” in its name. However, over time, the institutional-backed stocks with solid fundamentals and robust earnings growth provide the most sustainable moves. For example, Nvidia ((NVDA - Free Report) ), which is up nearly 200% over the past year, has grown EPS at a juicy triple-digit clip for four straight quarters and has deep-pocketed institutional backers like Fidelity.
Image Source: TradingView
Conversely, unprofitable, non-institutional quality AI companies like C3.AI ((AI - Free Report) ) are dramatically underperforming tech leaders like Meta Platforms ((META - Free Report) ).
Image Source: Zacks Investment Research
2. Look for Companies Selling “The Picks and Shovels”
During the gold rush, innovative entrepreneurs became rich by selling the picks and shovels rather than searching for the gold itself. For example, Levi Strauss’s (LEVI) business exploded as the company cashed in on selling clothing to get-rich-quick adventurers.
Again, history repeats itself on Wall Street. Investors are beginning to understand how much energy will be required to run the data centers needed for the AI revolution. Utilities like Vistra ((VST - Free Report) ), solar makers like First Solar ((FSLR - Free Report) ), and uranium miners like Cameco ((CCJ - Free Report) ) are all less obvious ways savvy investors have cashed in on the rush.
3. Trends Tend to Persist
Growth investing legend William O’Neil once pointed out, “It is one of the great paradoxes of the stock market that what seems too high usually goes higher, and what seems too low usually goes lower.” I have found this quote to be accurate. Investors do not need to catch bottoms to be successful. Instead, they can latch on to momentum trades and manage downside risk. Super Micro Computer ((SMCI - Free Report) ) gained nearly 250% in 2023. However, the stock was far from done. SMCI quadrupled in early 2024 before retreating recently.
Image Source: Zacks Investment Research
4. Valuation is Not a Timing Tool
An important lesson is that valuation metrics like the price-to-sales (P/S) ratio are not a valid timing tool – especially for innovative growth stocks. While the numerator (price) is known, the denominator (sales) is not known (moving forward). Because of this misconception, Zacks Investment Research heavily weights its analysis and ratings based on forward EPS expectations. Amateur investors would probably be surprised to find that NVDA’s p/s has actually fallen since mid-2023 despite the massive bull move in the stock.
Image Source: Zacks Investment Research
5. Moving Averages are a Trend Guide
The 10-week moving average is a fantastic trend guide for intermediate growth investors because institutional investors tend to support stocks at this level if they intend to increase their position. AI play Arm Holdings ((ARM - Free Report) ) is a perfect example of the power of the 10-week average. Investors who only held onto the stock when it trended above the 10-week captured much of the gains while avoiding disaster.
Image Source: TradingView
Bottom Line
Each moment on Wall Street is unique. However, history tends to rhyme when it comes to megatrends.
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AI Bull Market: 5 Lessons to Learn
Though investors may have forgotten by now, the 2022 tech bear market was brutal for U.S. equities. The sugar high from government spending led to several adverse factors. Forty-year highs in inflation spurred Federal Reserve Chairman Jerome Powell to change the Fed’s multi-year (and seemingly never-ending) “Dovish” monetary stance to a complete 180-degree turn.
In an attempt to quell rampant inflation and provide an oasis for the regional banking sector (which was on the brink of failure), Powell hiked interest rates at a dizzying speed. In turn, high-valuation growth stocks got pummeled, and the Nasdaq 100 ETF ((QQQ - Free Report) ) lost a third of its value.
Capitalism to the Rescue in the form of AI Stocks
Though the bear market was brutal for Wall Street, America’s history illustrates that bear markets ultimately transform into opportunities for investors wise enough to have liquidity. That’s because America’s best and brightest minds never stop innovating. In other words, innovation leads to earnings growth, and EPS growth sparks share prices.
ChatGPT Launch Changes the Game
The launch of OpenAI and Microsoft’s ((MSFT - Free Report) ) ChatGPT Artificial Intelligence (AI - Free Report) chatbot marked the turning point for the tech sector and the U.S. equities market. Within weeks of its launch, ChatGPT grew like wildfire and became the fastest consumer software app to eclipse the 100-million user mark in history.
Though there are no signs that the AI revolution is slowing, investors should learn lessons from what we have seen thus far -- because history tends to repeat itself.
5 Lessons to Learn from the AI Stock Boom
1. Invest in Leaders, Avoid Laggards
When a mega-trend captures the public’s interest, it can be easy for investors to be less selective. For example, in the heat of the internet bubble in the late 1990s, investors bid up any stock with a “.com” in its name. However, over time, the institutional-backed stocks with solid fundamentals and robust earnings growth provide the most sustainable moves. For example, Nvidia ((NVDA - Free Report) ), which is up nearly 200% over the past year, has grown EPS at a juicy triple-digit clip for four straight quarters and has deep-pocketed institutional backers like Fidelity.
Image Source: TradingView
Conversely, unprofitable, non-institutional quality AI companies like C3.AI ((AI - Free Report) ) are dramatically underperforming tech leaders like Meta Platforms ((META - Free Report) ).
Image Source: Zacks Investment Research
2. Look for Companies Selling “The Picks and Shovels”
During the gold rush, innovative entrepreneurs became rich by selling the picks and shovels rather than searching for the gold itself. For example, Levi Strauss’s (LEVI) business exploded as the company cashed in on selling clothing to get-rich-quick adventurers.
Again, history repeats itself on Wall Street. Investors are beginning to understand how much energy will be required to run the data centers needed for the AI revolution. Utilities like Vistra ((VST - Free Report) ), solar makers like First Solar ((FSLR - Free Report) ), and uranium miners like Cameco ((CCJ - Free Report) ) are all less obvious ways savvy investors have cashed in on the rush.
3. Trends Tend to Persist
Growth investing legend William O’Neil once pointed out, “It is one of the great paradoxes of the stock market that what seems too high usually goes higher, and what seems too low usually goes lower.” I have found this quote to be accurate. Investors do not need to catch bottoms to be successful. Instead, they can latch on to momentum trades and manage downside risk. Super Micro Computer ((SMCI - Free Report) ) gained nearly 250% in 2023. However, the stock was far from done. SMCI quadrupled in early 2024 before retreating recently.
Image Source: Zacks Investment Research
4. Valuation is Not a Timing Tool
An important lesson is that valuation metrics like the price-to-sales (P/S) ratio are not a valid timing tool – especially for innovative growth stocks. While the numerator (price) is known, the denominator (sales) is not known (moving forward). Because of this misconception, Zacks Investment Research heavily weights its analysis and ratings based on forward EPS expectations. Amateur investors would probably be surprised to find that NVDA’s p/s has actually fallen since mid-2023 despite the massive bull move in the stock.
Image Source: Zacks Investment Research
5. Moving Averages are a Trend Guide
The 10-week moving average is a fantastic trend guide for intermediate growth investors because institutional investors tend to support stocks at this level if they intend to increase their position. AI play Arm Holdings ((ARM - Free Report) ) is a perfect example of the power of the 10-week average. Investors who only held onto the stock when it trended above the 10-week captured much of the gains while avoiding disaster.
Image Source: TradingView
Bottom Line
Each moment on Wall Street is unique. However, history tends to rhyme when it comes to megatrends.